GST and agricultural managed investment scheme - pre-establishment acquisitions

Is the entity entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for acquisitions made to set-up and promote a forestry managed investment scheme, prior to the establishment of the scheme?

Yes. The entity is entitled to input tax credits under section 11-20 of the GST Act, for acquisitions made to set-up and promote the forestry managed investment scheme, prior to the establishment of the scheme.

The scheme: • is a 'forestry managed investment scheme' as defined in subsection 394-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997); • is a registered managed investment scheme under the Corporations Act 2001 (Corporations Act); and • involves the establishment and tending of trees for felling in Australia.

The scheme constitution establishes the scheme and in relation to the participants provides: • the consideration payable by the participants of the scheme is to acquire an interest in a managed investment scheme (being an interest in security for the purposes of item 10 of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999); • the consideration payable by the participants for the interest includes an initial contribution (which can be paid as a single payment or as regular contributions), and additional contributions to meet the costs of harvest and after-harvest activities; • the participant's interest in the scheme entitles the participant to receive a proportional amount of the income of the scheme, after deduction of all amounts the 'responsible entity' (RE) is entitled to deduct from that income; and • the participant has no interest in the product of the scheme.

Under the scheme documents the participants do not acquire an interest in the land and do not enter into an agreement for the management of the plantation.

The contributions of money by the participant to the scheme, and the property acquired (directly or indirectly) with the contributions of money, are 'scheme property' as defined by the Corporations Act. Under subsection 601FC(2) of the Corporations Act, the RE holds such scheme property on trust for the participants. Under paragraph 184-1(1)(g) of the GST Act such a trust is an entity for GST purposes ('trust entity').

A trust (and therefore a trust entity) logically comes into existence when subsection 601FC(2) of the Corporations Act operates to create a trust over the scheme property. The scheme's documentation does not provide for a trust coming into existence at an earlier point in time, and therefore there is a trust entity established at the time there is scheme property (as defined in the Corporations Act).

The constitution provides: • for the appointment of the entity as the RE to carry out the activities for the scheme, including establishing the plantation, and the harvest and after-harvest activities. The RE also has sole authority to market and sell the product; • the RE is entitled to be paid out of scheme property for activities carried out for the scheme; and • the RE may engage the services of suitably qualified, experienced and reputable consultants in the field of silviculture, to provide the RE with all such advice and assistance that the RE requires to carry out management, harvest and after harvest activities.

Prior to there being scheme property (as defined in the Corporations Act), the entity makes acquisitions to set up and promote the scheme, including acquisitions of: • accounting services; • advice in respect of income tax Product Ruling preparation; • legal services; and • services to prepare the product disclosure statement and other marketing documentation.

After there is scheme property (as defined in the Corporations Act), the entity makes acquisitions that relate solely to the management of the participants' interests in the scheme, including the necessary accounting and legal services.

The entity also makes acquisitions (after the scheme is established) that relate solely to carrying on the agricultural enterprise, including: • plantation management services (for example, planting, thinning and harvesting services); and • product distribution services (for example, transport, sale and marketing services).

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes.

Under section 11-5 of the GST Act, an entity makes a 'creditable acquisition' if: (a) the entity acquires anything solely or partly for a *creditable purpose; and (b) the supply of the thing to the entity is a *taxable supply; and (c) the entity provides, or is liable to provide, *consideration for the supply; and (d) the entity is *registered or *required to be registered for GST. * denotes a term defined in the Dictionary, starting at section 195-1 of the GST Act.

'Creditable purpose' is defined in section 11-15 of the GST Act as follows: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature.

Goods and Services Tax Ruling GSTR 2008 / 1 Goods and services tax : when do you acquire anything or import goods solely or partly for a creditable purpose (GSTR 2008/1) explains the Commissioner's approach to determining whether an acquisition relates to the making of supplies that would be input taxed. GSTR 2008/1 states at paragraph 119: For the purposes of paragraph 11-15(2)(a) of the GST Act a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Paragraph 128 of Miscellaneous Tax Ruling MT 2006 / 1 Miscellaneous Tax : the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number states that activities undertaken to establish an entity, for example drawing up a trust deed and the settlement of trust property are not commencement activities. This is because the trust cannot commence activities until it is in existence.

By reason of the scheme documentation, the Corporations Act and paragraph 184-1(1)(g) of the GST Act, there is scheme property held on trust, and therefore a trust entity for the GST, at the time the trust relationship is established under subsection 601FC(2) of the Corporations Act.

Consequently, for the purposes of section 11-5 of the GST Act, any acquisitions made prior to there being a trust entity can only be made by the entity in its corporate capacity, that is, the acquisitions cannot be made by the entity in its capacity as trustee of the trust entity, as the trust entity does not yet exist.

For the purposes of 11-15(1) of the GST Act, these acquisitions are acquired by the entity in carrying on its enterprise.

Although the trust entity (once it exists) will make input taxed supplies to participants, the entity in its corporate capacity does not make input taxed supplies in relation to the establishment of the scheme. Therefore, for the purposes of paragraph 11-15(2)(a) of the GST Act, the acquisitions made by the entity do not relate to making input taxed supplies.

Because the acquisitions made to set-up and promote the scheme are made by the entity in carrying on its enterprise, and the acquisitions do not relate to the entity making input taxed supplies, the acquisitions are made for a creditable purpose.

Provided the other requirements of section 11-5 of the GST Act are met, the entity will be entitled to input tax credits under section 11-20 of the GST Act for such acquisitions.